Corporate Finance - Corporate Finance Section 2
- Option : B
- Explanation : Operating income for 8 million cars = 8 million (25,000 – 14,000) – 15 billion = 73 billion. DFL = [Q(P - V) - F] / [Q(P - V) - F - C] = (Rs.73 billion) / (Rs.73 billion – Rs.65 billion) = 9.13.
- Option : A
- Explanation : For highly leveraged firms, that is firms with a high proportion of fixed costs relative to total costs, a small change in sales will have a big impact on earnings.
43. The following data is available for two companies.
| Siptea | Brewers | |
| Number of units sold | 200,000 | 200,000 |
| Sales price per unit | $150 | $150 |
| Variable cost per unit | $43 | $98 |
| Fixed operating cost | 500,000 | 150,000 |
| Fixed financing cost | 100,000 | 50,000 |
The DOL for Siptea and Brewers are closest to:
- Option : B
- Explanation : DOL for Siptea: [200,000 ($150 – $43)] / [200,000 ($150 – $43) – 500,000] = 1.024. DOL for Brewers: [200,000 ($150 – $98)] / [200,000 ($150 – $98) – 150,000] = 1.015.
- Option : B
- Explanation : A is a true statement because higher leverage implies a greater interest expense and hence a lower net income. C is true because both companies have the same revenue and operating income. With similar assets, Asparagus has more leverage which means equity is lower. Hence ROE is likely to be higher, not lower, relative to Supras.
45. The following data is available for Ejaz Business:
| Number of units sold | 1 million |
| Sales price per unit | Rs. 100 |
| Variable cost per unit | Rs. 20 |
| Fixed operating cost | 5 million |
| Fixed financing cost | 1 million |
The degree of total leverage for the companyis closest to:
- Option : B
- Explanation : DTL = [Q(P - V)] / [Q(P - V) - F - C] = [1 million (Rs.100 – Rs.20)] / [1 million (Rs.100 – Rs.20) – 5 million – 1 million] = 1.08.
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